Retirement Plan Basics

Retirement Plan Basics

Qualified plans

The advantages of qualified plans

Non-qualified plans

Vesting

Qualified plans

Must meet strict IRS requirements

• Must be nondiscriminatory (can't favor high-income employees or owners)
• Amounts contributed on tax-deferred basis are limited
• Amounts generally can not be withdrawn before age 59.5 without penalty

The advantages of a qualified plan

Amount contributed by company is immediately tax deductible for the company

Amount contributed is not taxable to worker until retirement

Income earned is not taxed until withdrawn

Non-qualified plans

Allow for additional retirement savings in a less favorable manner

Amounts contributed are generally after-tax contributions

Generally not subject to nondiscriminatory requirements

Amounts contributed generally not limited

Not granted high degree of protection in bankruptcy court

Examples : SERPs (Supplemental Executive Retirement Plans)

Vesting

Most employer contributions become vested within five years or less

Cliff vesting schedule (percent vested at end of year)

Year	Percent vested
1	0%
2	0
3	0
4	0
5	100

Graduated vesting schedule (percent vested at end of year)

Year	Percent vested
1	0%
2	0
3	20
4	40
5	60
6	80
7	100

Many companies have more generous vesting schedules

Above schedules are worst case allowable

If you quit before the end of five (or seven) years, employer contributions are generally forfeited to other plan beneficiaries

Example :

You're in a seven-year graduated plan

Your employer had contributed $10,000 in your name to your account

You leave after finishing four years

You keep $4,000 and forfeit $6,000 to other plan members

But note : All savings contributed by you are always yours!